Supreme Court: states can be sued under bankruptcy law

WASHINGTON (Reuters) – States can be sued in certain
bankruptcy proceedings, a divided U.S. Supreme Court ruled on
Monday in a case that pitted state powers against those of the
federal government.

By a 5-4 vote, the high court rejected arguments that
states could not be sued because of state sovereign immunity.
The court said Congress, in adopting the bankruptcy law, has
the power to treat states the same way as other creditors.

The decision departed from the series of rulings in recent
years by the court’s conservative majority that generally have
expanded the immunity of states from lawsuits while cutting
back on the power of Congress.

The case involved four state-run colleges in Virginia —
Central Virginia Community College, Virginia Military
Institute, New River Community College and Blue Ridge Community
College.

Wallace Bookstores, which operated a chain of college
bookstores, filed for bankruptcy in 2001. The liquidating
supervisor of the bankruptcy estate sued the four colleges in
an attempt to recover money owed to Wallace.

The colleges moved to dismiss on the grounds that state
sovereign immunity barred the lawsuit. But a federal bankruptcy
court, a federal judge and a U.S. appeals court all rejected
the request and said Congress acted within its power in
revoking state immunity in bankruptcy proceedings.

The high court, in an opinion written by Justice John Paul
Stevens, agreed. He was joined by Justices Sandra Day O’Connor,
David Souter, Ruth Bader Ginsburg and Stephen Breyer.

Stevens said the ruling involved proceedings initiated by a
bankruptcy trustee to set aside preferential transfers by the
debtor to state agencies.

Chief Justice John Roberts and Justices Clarence Thomas,
Antonin Scalia and Antonin Kennedy dissented. Thomas wrote that
the majority opinion cannot be justified by the U.S.
Constitution and that it conflicted with the court’s precedents
on state sovereign immunity.